Startups Need to Focus on IP Ownership

By October 12, 2016Contracts

Too many startups are not paying enough attention to their ownership of intellectual property. When forming a startup, founders seem to spend more time deliberating entity selection than they do IP ownership. Poor entity selection can be fixed at any time with limited business disruption—failure to own IP can be fatal. Establishing a clear chain of IP ownership may be the most important legal issue for a technology startup.

188hThe easiest way for a startup to establish IP ownership is by using invention assignments early and often. When the startup is formed, each founder should sign an invention assignment when he or she receives ownership in the startup. After that, every employee and every contractor should sign an invention assignment before they do anything for the startup. In the context of IP, employees and contractors should be viewed as providers of goods, not services. You get a receipt when you buy office supplies, and the same should be true when you buy IP. The invention assignment acts as the receipt that shows that the startup owns its IP.

If you do not have documented ownership of your IP, you are placing the existence of your startup at risk. You will have difficulty defending against a claim of IP infringement or misappropriation, and you will have difficulty stopping co-founders, employees, and contractors from using “your” IP to compete against you. Both of these situations could shut you down.

In addition, failure to have clear ownership of IP will complicate or eliminate a startup’s ability to obtain financing. In early (like convertible notes or Series Seed preferred stock) and later (like Series A preferred stock) financings, a startup typically must represent to investors that it owns all of the IP needed to carry on its business. These financings typically require the company to represent that all employees and contractors have signed an invention assignment.

Failure to have clear ownership of IP also will complicate or eliminate a startup’s ability to be acquired. IP representations will be complex in a merger or sale transaction. For example, the merger agreement between MeetMe and Skout contained at least 14 paragraphs of IP representations, including a representation that each employee or contractor who was involved in the creation or development of IP signed a valid, enforceable agreement containing an IP assignment. One of the first things that a purchaser will request during due diligence is the startup’s form of invention assignment and confirmation that all founders, employees, and contractors have signed it.

Bob Muraski is a business attorney based in Bellingham, Washington. Photo Credit: Ryan McGuire/Gratisography.